Japan’s Economy Reborn! Or Not…

Japan’s economy expanded by more than 1% in the first quarter of this year and looks like it will repeat this in the second quarter. The main driver of this increase in activity is domestic spending.

This level of GDP growth puts Japan on track for a rise of 4% or more for the year, which would indeed be cause for celebration. Except for one thing… the horrific cost required to get this type of economic expansion.

The reason Japan is currently “enjoying” something of a growing economy is because it is rebuilding after the 9.0 earthquake and 23-foot tsunami that struck the country in 2011, leaving over 15,000 dead and causing irreparable harm to a nuclear reactor that contaminated the surrounding ocean and countryside.

In the weeks and months after the disasters, Japan shut down its remaining nuclear reactors and dealt with severe energy shortages, cutting back on manufacturing and air-conditioning alike.

By the end of 2011, plans were drawn and rebuilding was starting. Now efforts to remediate the affected areas are in full swing and there’s even talk of bringing some nuclear power back online to alleviate the energy shortage.

If this is what it takes to bring on 4% growth in GDP, I think I’d rather have economic malaise, thank you very much…

By this logic, we should level a medium-sized city once a year and then “invest” in its redevelopment.

The sad truth about Japan is that the country is on a crash course with its population. Long ago the Japanese decided their own fate, not by what they did, but by what they didn’t do. The Japanese don’t have enough children. The birth rate in Japan is somewhere around 1.3 children per woman of child-bearing age, and has been for years.

It’s been decades since the Japanese had a birth rate even close to the 2.1 children-per-women replacement-rate they need. This trend has caused the country to steadily shrink.

There are fewer Japanese people today than there were in 2011, and less then than in 2010, and so forth… all the way back to 2005.

More people have died than have been born in Japan every year since 2005. This trend projects into the future with no end in sight. The Japanese government estimates that the country will lose 1/3rd of its entire population by 2060, and that, by then, 40% of the population will be over 65.

There is no plan to “fix” this. Even if there was, what would it be?

There’s nowhere from which a country can import children en mass. One suggestion has been to allow waves of migration. Unfortunately, Japan is a notoriously closed society that frowns on immigration.

Oddly, the closest country that would seem a likely candidate to send people to Japan would be China. The problem is, the Chinese remember the horrific actions of the Japanese military during the occupation of China in the 1930s and 1940s. This would be analogous to, but not exactly like, having the Germans needing a lot of immigrants from Israel. It would understandably make a lot of people nervous.

So what will Japan do?

How will it pay the pensions of the millions of aging Japanese when it doesn’t have enough workers, and it doesn’t have enough domestic demand to employ the young people today?

How will the country deal with the loss of population when it frowns on immigration? How will it provide healthcare for the tens of millions of Japanese that are not capable of caring for themselves and have no children to look after them?

We don’t have the answers. Neither does Japan.

A 4% pop in GDP that is based on rebuilding after a natural disaster won’t change the long term outlook for Japan. The country is all but dead. It’s just going to take a long time for everyone to realize it.

That’s why we don’t suggest investing in Japan, unless it’s to bets against Japan’s economy. We are currently monitoring Japanese securities, with an eye towards going short. We’ll let you know when the time is right.

Rodney

Publishers Note: We do have one position in our Boom & Bust portfolio right now that takes advantage of Japan’s decline. And it’s still a buy. To help you get this stock into your portfolio, so you can boost your investment account balance, I’m slashing the subscription price in half. Get your 50% off now.

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.